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Thread: Cash Damming

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    Default Cash Damming

    Came across this term when reading about the Smith
    Maneuver. Googling it, and even the big 5 banks mention this on websites, sounds pretty mainstream.

    One aspect mentioned in most websites, is this strategy won't yield good results if the LOC interest rate is higher than mortgage rate, although this is always the case.

    Anyone currently doing this?

    Any thoughts or advice?
    My Karma ran over your Dogma

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    Had never heard of it, and the National Bank website explains why:
    Quote Originally Posted by National Bank
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    Who can use this strategy?
    First of all, it’s important to note that only rental property owners, self-employed workers who are not incorporated, sole business proprietors and the partners of a general partnership can employ cash damming as a tax strategy.
    https://www.nbc.ca/personal/advice/t...%20deductible.
    Quote Originally Posted by schurchill39 View Post
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    Oh god, don't get him started.

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    EDIT - he should be called ExtraFast


    What is cash damming?
    Definition from this link:
    https://www.nbc.ca/personal/advice/t...s%20deductible.

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    My Karma ran over your Dogma

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    Wow I've already used this technique with rentals. Didn't know there was a name for it. Trust those MBA'ers to think of one with their $90K education. So smart.

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    Quote Originally Posted by mr2mike View Post
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    Wow I've already used this technique with rentals. Didn't know there was a name for it. Trust those MBA'ers to think of one with their $90K education. So smart.
    Based on the criteria listed by Extrafast above, you have to be anything but a salaried employee, was this the case for you also?

    I don't understand the concept, how does having a rental expense justify making your principle mortgage a tax deduction?
    My Karma ran over your Dogma

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    Quote Originally Posted by cidley69 View Post
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    Based on the criteria listed by Extrafast above, you have to be anything but a salaried employee, was this the case for you also?

    I don't understand the concept, how does having a rental expense justify making your principle mortgage a tax deduction?
    Income is income, so you use the rental income to pay your own mortgage while maximizing the debt on the rental property.
    Originally posted by max_boost
    Hey baller, any problem money can solve is no problem at all. Don't sweat it.

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    Thanks for this, i had no idea this was a thing. Going to look into it to see if it makes sense for my situation. Biggest question for me is that i have a major expense coming up for my rental ($3500 window) so i wonder if i could use this as an expense or if that counts more as a Capital Expense and not allowed to use this method for it.

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    With interest rates so low currently, I can't picture how this works in favor for the person doing this right now. Am I wrong?...

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    Quote Originally Posted by Disoblige View Post
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    With interest rates so low currently, I can't picture how this works in favor for the person doing this right now. Am I wrong?...
    It doesn't really unless you own your rental property outright. I write off the interest, portion of the mortgage, property tax, and insurance. My "income" is essentially zero at that point but i am cashflow positive monthly after expenses.

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    Quote Originally Posted by sabad66 View Post
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    Thanks for this, i had no idea this was a thing. Going to look into it to see if it makes sense for my situation. Biggest question for me is that i have a major expense coming up for my rental ($3500 window) so i wonder if i could use this as an expense or if that counts more as a Capital Expense and not allowed to use this method for it.
    I'm not sure you're looking at it right. As I understand it, if we're looking strictly from a cash damming point of view - instead of paying for the window with cash in your bank account, you've already put that cash into the mortgage on your personal residence, and you borrow $3,500 from an LOC to pay for the window. The interest on $3,500 from the LOC used to pay for the window is tax deductible, whereas the interest $3,500 in your personal mtg is not.
    Originally posted by max_boost
    Hey baller, any problem money can solve is no problem at all. Don't sweat it.

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    Quote Originally Posted by sabad66 View Post
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    Thanks for this, i had no idea this was a thing. Going to look into it to see if it makes sense for my situation. Biggest question for me is that i have a major expense coming up for my rental ($3500 window) so i wonder if i could use this as an expense or if that counts more as a Capital Expense and not allowed to use this method for it.
    I think it's more like you want to drop $80K on a Supra. Instead getting Toyota finance, you just leverage HELOC on your rental and then write off that $3-$4k/year of interest against income of your rental.

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    All I know is the more complex the strategy the smarter it is for the average Joe! Go get em brother.
    Quote Originally Posted by schurchill39 View Post
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    Oh god, don't get him started.

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    Cash damming sounds like the Smith Maneuver but instead of investing you just spend the money.
    ---

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    Quote Originally Posted by kenny View Post
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    Cash damming sounds like the Smith Maneuver but instead of investing you just spend the money.
    That's the path to winning. Just spend more money.
    Quote Originally Posted by schurchill39 View Post
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    Oh god, don't get him started.

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    This strategy doesn't really make sense to me unless you were using the LOC to pay off a much higher interest loan. In the RBC link's example you spend an extra $5000 on LOC to save $1750 in taxes?? This strategy is listed on NB and RBC because its profitable for the banks.

    When I had both a principal and rental property I just refinanced my rental property's mtg so it was as high as possible and used extra cash to pay down my principal home mtg. No need to spend $$$ on a LOC.

    Quote Originally Posted by Strider View Post
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    I'm not sure you're looking at it right. As I understand it, if we're looking strictly from a cash damming point of view - instead of paying for the window with cash in your bank account, you've already put that cash into the mortgage on your personal residence, and you borrow $3,500 from an LOC to pay for the window. The interest on $3,500 from the LOC used to pay for the window is tax deductible, whereas the interest $3,500 in your personal mtg is not.
    That $3500 is spent on his rental property. That's just a straight up tax deduction. No need to get complicated spending more money on a LOC or claiming CCA & depreciation on your rental property.

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    Quote Originally Posted by Manhattan View Post
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    When I had both a principal and rental property I just refinanced my rental property's mtg so it was as high as possible and used extra cash to pay down my principal home mtg. No need to spend $$$ on a LOC.

    That $3500 is spent on his rental property. That's just a straight up tax deduction. No need to get complicated spending more money on a LOC or claiming CCA & depreciation on your rental property.
    Isn't this the same idea as refinance, except ongoing? If you could get an LOC at a comparable rate to mtg, then every rent cheque goes into the non-deductible mtg and monthly expenses get paid out of deductible LOC?
    Not sure if you could do both..? $3,500 expense on rental property, but also interest on borrowed $3,500.

    Definitely a go consult your accountant moment here, I'm not offering any advise.
    Originally posted by max_boost
    Hey baller, any problem money can solve is no problem at all. Don't sweat it.

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    Quote Originally Posted by Manhattan View Post
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    That $3500 is spent on his rental property. That's just a straight up tax deduction. No need to get complicated spending more money on a LOC or claiming CCA & depreciation on your rental property.
    Generally windows (and other improvements/upgrades that increase the value of the property such as kitchen/bathroom renos) can't be claimed as normal rental operating expenses and instead need to be treated as Capital expenses. They can be if it's replacing say a window that was accidentally broken but not something like a replacement of a rotting 40 year old window like my case. see the last question here:
    https://www.ecolinewindows.ca/window...d-should-know/

    I was hoping this could be some sort of loophole around that but not sure. Def need to get professional advice on this for my case.

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    Quote Originally Posted by sabad66 View Post
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    Generally windows (and other improvements/upgrades that increase the value of the property such as kitchen/bathroom renos) can't be claimed as normal rental operating expenses and instead need to be treated as Capital expenses. They can be if it's replacing say a window that was accidentally broken but not something like a replacement of a rotting 40 year old window like my case. see the last question here:
    https://www.ecolinewindows.ca/window...d-should-know/

    I was hoping this could be some sort of loophole around that but not sure. Def need to get professional advice on this for my case.
    You can call CRA for help on interpreting the rules but if you're replacing a single rotten/leaky window and fixing any damages (on wall for example), that is considered a repair. If you are replacing all of your windows simply because they're old then it is a capital expense.

    It also matters when you are incurring these expenses. For example, painting walls on an occupied rental unit = maintenance. Painting walls on an unoccupied unit in between renters and you are improving the condition and should be considered a capital expense.

    When in doubt, claim everything as current expense and be ready to explain if you get audited.
    ---

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